Crisis states lead way as euro zone's economic mood brightens

BRUSSELS (Reuters) - Confidence in the euro zone economy grew by more than expected in May, with hope that the worst of the crisis may be over spreading to countries that have been on its frontline.

A women holding an umbrella stands in front of the Austrian central bank in Vienna May 27, 2013. REUTERS/Leonhard Foeger

Economic morale in the 17 states that use the euro increased by 0.8 point to 89.4, the European Commission said. Economists polled by Reuters had expected an increase to 89.0.

“This is in line with a moderate improvement, but we need to see this sustained,” said Francois Cabau, an economist at Barclays Capital. “We also need to see this translate into the real growth.”

In Greece, the first euro zone state to be bailed out and heading for its sixth straight year of recession, sentiment climbed to a five-year high, while Portugal and Italy also recorded stronger readings.

“For the crisis countries, (this data offers) yet more signs that the worst is over. Southern Europe saw some of the strongest improvements,” Christian Schulz, senior economist at Berenberg Bank, wrote in a note.

The OECD said on Wednesday the euro zone economy will contract by 0.6 percent this year, rebounding by 1.1 percent in 2014 - a more pessimistic picture for the bloc than predicted by the European Commission, which sees a 0.4 contraction in 2013.

After a strong start to the year, economic morale weakened in March, clouding hopes for swift recovery.

But in May confidence improved in all five of the euro zone’s largest economies - Germany, France, Italy, Spain and the Netherlands. The upturn was notable across all sectors except for construction.

The bloc’s largest economy, Germany, which is expected to gather momentum in the second quarter of this year, saw a 0.6 point rise in its economic mood, while recession-hit France registered a 0.9-point jump.

Morale in bailed-out Portugal rose 1.8 to 84.2 and in Italy gained 1.5 to 84.9, though Spain inched up just 0.1 to 89.8.

Helping to buoy hopes of recovery, the European Central Bank cut its key interest rate this month to a new record low and said the euro zone was more stable than a year ago - though economic conditions remained challenging and governments needed to push on with reforms.

ECB President Mario Draghi has said the bank is ready to cut interest rates again if the bloc’s economy deteriorates further.

The increase in industrial confidence was driven by a much more positive assessment of the current level of order books, the Commission said.

The Commission’s measure of the euro zone’s business cycle also picked up again in May, increasing by more than expected to -0.76, compared with economists’ consensus for a -0.87 level.